The proposed Business Laws (Amendment) Bill 2024 may have unintended consequences for foreign debt investment in Kenya, particularly regarding Kenyan companies' access to international credit.
The Bill, in its current form, requires all credit businesses offering credit to members of the public who are not already regulated under existing laws to obtain licences from the Central Bank of Kenya (CBK).
However, the Bill does not clearly define the term "members of the public." This lack of clarity could result in a wide interpretation, potentially including Kenyan corporate borrowers such as banks and other businesses.
Consequently, the Bill could apply to foreign investment banks, investment funds, and other international lenders who provide debt financing to Kenyan companies. This would require them to establish local subsidiaries in Kenya and obtain licences from the CBK.
Potential impact on foreign lenders, Kenyan companies
In practice, foreign lenders typically invest in businesses across various countries from a centralised jurisdiction. The process of establishing a local subsidiary and obtaining a licence in Kenya would involve significant time and resources and would have tax implications.
This requirement may dissuade foreign lenders from setting up operations in Kenya only to provide debt to a handful of Kenyan companies in their portfolio. Faced with such barriers, many foreign lenders might choose to entirely refrain from providing debt capital to Kenyan companies, depriving local firms of much-needed financing.
As the main intention behind regulating credit is to protect consumers, applying these regulations to credit providers lending to corporate entities seems disproportionate.
Companies, especially bigger ones, are generally able to negotiate their credit agreements. These are often based on balanced templates that are widely accepted in international markets. These agreements provide a framework that facilitates access to international debt capital for Kenyan companies.
According to the 2023 Foreign Investment Survey Report, private sector external debt is a key source of foreign capital for the Kenyan corporate sector and is needed for innovation and growth. Subjecting foreign lenders to regulation by the CBK could unintentionally hinder the ability of Kenyan businesses to access funding from foreign markets.
Recommendations
To avoid the potential adverse effects on foreign investment in Kenya, it is recommended that the Business Laws (Amendment) Bill 2024 be revised to exclude corporate lending.
A similar approach is already taken in other jurisdictions, such as the United Kingdom, where credit regulation focuses primarily on consumer lending.
In South Africa, the credit regulatory framework does not apply to corporate lending where the borrowers meet a specified turnover threshold or where the loan amounts in credit agreements exceed a specified value.
By adopting a similar framework, Kenya could strike a balance between protecting consumers and not disproportionately restricting corporate access to foreign debt capital. Excluding corporate lending from the scope of the Bill, or setting thresholds for certain types of credit agreements, would help ensure that the objectives of the regulation are met without discouraging foreign investment.
The provisions of the Bill also touch on credit guarantees, excluding credit guarantee providers that are owned by foreign governments or foreign financial institutions, as well as those that have agreements with the Kenyan government or are partnering with Kenyan financial institutions.
While this exclusion is aimed at protecting local interests, it remains restrictive. A more favourable approach would be to extend similar exclusions to these guarantee providers as is proposed for lenders.
In conclusion, while the Business Laws Amendment Bill 2024 aims to protect consumers and regulate credit businesses, its current provisions may have unintended consequences for the foreign debt investment landscape in Kenya.
By revising the Bill to exclude corporate lending or introducing thresholds for credit agreements, Kenya can safeguard its position as an attractive destination for foreign capital.
These changes would help maintain a robust regulatory environment while facilitating access to debt capital for Kenyan businesses, ensuring they remain competitive in the global market.
Dominic is partner, and Cynthia, senior associate at Bowmans Kenya
